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ICBA strongly urges regulators to enhance the ability of banks of all charter types and sizes to offer responsible small-dollar loans by:
Promoting community banks as model small-dollar lenders.
Providing a presumption of CRA credit for originating small-dollar loans.
Easing fair lending examination scrutiny and establishing consistent and transparent fair lending examination standards for small-dollar lending.
Providing banks the flexibility to offer small-dollar credit products that exceed 36 APR.
ICBA strongly supports the exemption contained in the CFPB’s original final rule on payday, vehicle title, and certain high-cost installment loans, commonly known as small-dollar loans. Any lender that makes 2,500 or fewer covered short-term or balloon-payment small-dollar loans per year and derives no more than 10 percent of its revenue from such loans is excluded from the rule’s full-payment test or the principal-payoff option.
Having strong ties to the customers and communities they serve positions community banks to provide small-dollar loan services to customers with the greatest need. By their nature, community banks are in the business of creating customized solutions for their customers.
Community banks work with customers to structure loans that ensure the customer is able to access safe and sustainable financing. Small dollar loan products offered by community banks help consumers avoid the negative consequences associated with payday loans and non-traditional loan products offered by non-banks.
Each community bank that makes small-dollar loans underwrites these loans in a way that works for them and their customers. The community bank business model does not include rolling over loans to generate fee income or steering consumers to unaffordable loan products.
Generally, community banks offer personal loans as a service to customers who have a financial history upon which to base a credit decision. These products are offered as a customer accommodation and are not typically advertised. The nature of these loans renders standardized underwriting and credit decision models ineffective or counterproductive to meeting the short-term financial needs of customers. Additionally, these loans are rarely profitable for community banks due to the small dollar amounts and the associated overhead and servicing costs.
On October 5, 2017, the CFPB issued a final rule covering payday, vehicle title, and similar loans designed to curb abuses or “debt traps” such as repeat short-term borrowing, default, vehicle seizure, penalty fees, and closure of bank accounts. The rule requires lenders to determine whether a consumer has the ability to repay a loan before extending credit.
On February 6, 2019, the CFPB announced its proposal to rescind certain provisions of its rule. Specifically, the CFPB proposed to drop the rule’s requirement that lenders assess an applicant’s ability to repay and make certain underwriting determinations before issuing small-dollar loans, which the Bureau said would reduce access to credit. On July 7, 2020, the CFPB issued its final rule rescinding the ability to repay and underwriting provisions.
Since the release of the rule, other agencies have signaled their support for banks involvement in small-dollar lending. On May 23, 2018, the OCC issued its core principles, policies, and practices for short-term, small-dollar installment lending to encourage banks to offer such loans responsibly to help meet the credit needs of consumers. On November 14, 2018, the FDIC issued a request for information soliciting input on steps it can take to enable and encourage FDIC-supervised institutions to offer small-dollar credit products that are structured prudently and responsibly. On March 19, 2020, the
Federal Reserve, FDIC, and the OCC issued a joint statement on Community Reinvestment Act (CRA) consideration for small-dollar lending activities in response to COVID-19, stating that for CRA purposes, the agencies will favorably consider retail banking and lending activities that meet the needs of affected low and moderate-income individuals, small businesses, and small farms, consistent with safe and sound banking practices and applicable laws.
On March 26, 2020, the Federal Reserve, FDIC, the NCUA, OCC, and the CFPB issued a statement encouraging financial institutions to offer responsible small-dollar loans to both consumers and small businesses to help customers meet their need for credit due to temporary cash-flow imbalances, unexpected expenses, or income short-falls during periods of economic stress or disaster recovery.
Staff Contact: Rhonda Thomas-Whitley